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Financial Planning > College Planning > Student Loan Debt

Profit Turned on AIG Facilities

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Two major loan facilities that enabled American International Group (AIG) to ride through a Force 5 financial typhoon have been fully repaid, the Federal Reserve Bank of New York (FRBNY) announced late Thursday.

In fact, AIG said in a separate statement, it has calculated that the FRBNY is likely to make up to $6 billion net profit on its $58.12 billion loan to AIG through the two facilities, Maiden Lane II and Maiden Lane III.

The $24.3 billion loaned to AIG in the fall of 2008 through the Maiden Lane II facility was repaid in full in April. The facility was collateralized by $39 billion in residential mortgage-backed securities that were originally collateralized by the reserves of AIG’s 13 life insurance subsidiaries.

The latest sales were from a $28.82 loan collateralized by exotic collateralized debt obligations backed by mortgage-backed securities held in the so-called Maiden Lane III facility

The approximate face value of the securities held in the Maiden Lane III portfolio was $62.1 billion; it reflected markdowns in value AIG had already taken against its earnings.

Maiden Lane III was used to cancel credit-default swaps that AIG had sold to protect counterparties against losses. The insurer needed to be rescued after it was unable to meet collateral calls from banks that included Goldman Sachs Group Inc., Deutsche Bank, Paribas and Societe Generale SA.

In comments Thursday at a securities conference in New York sponsored by Morgan Stanley, AIG SunAmerica chief executive officer Jay Wintrob said that based on current public information, the amount of the loan outstanding to the FRBNY in Maiden Lane III is $3.5 billion; however, with the auctions completed prior to this week the FRBNY loan will be fully repaid. 

With this repayment, AIG will now receive the next $5.6 billion in proceeds, followed by one third of all proceeds from the remaining assets, Wintrob said.

Wintrob had cited the value of the two facilities as indicating that AIG was gradually returning to financial health and off the government dole in an interview carried in the February edition of the National Underwriter Life & Health.

The FRBNY had started to sell securities held in the facilities starting in late 2011, but backed off because the securities it sold lost value after they were auctioned.

However, the market turned earlier this year because the underlying securities offered far higher yields than available on other securities offered to investors.

At the same time, the FRBNY said it plans to sell at auction an additional $5.2 billion of collateralized debt obligations held in the Maiden Lane III facility.

The collateralized debt obligations to be auctioned were created by TCW Group Inc. under former chief investment officer Jeffrey Gundlach, according to its website and data compiled by Bloomberg. TCW managed almost twice as many collateralized debt obligations that ended up in Maiden Lane III as anyone else, according to the Bloomberg data.

“The repayment of the Federal Reserve’s Maiden Lane III loan represents another significant milestone in the transformation of AIG,” said Robert H. Benmosche, AIG president and CEO.

“We are extremely encouraged by the continued progress our partners at the Federal Reserve and U.S. Treasury have made to profitably reduce the U.S. government’s investments in AIG,” he said.

William C. Dudley, president of the New York Fed, said, “This is a major milestone for the Bank and for the public.”

He said the successful repayment of the New York Fed’s loans to Maiden Lane II LLC and Maiden Lane III LLC marks the retirement of the last remaining debts owed to the FRBNY that stemmed from the crisis-era interventions with Bear Stearns and AIG. 

“The Maiden Lane entities were established to protect the U.S. economy at a time of great economic stress, and I am pleased we were able to accomplish that policy objective and be fully repaid,” Dudley added.

AIG requested government aid in mid-September 2008, when collateral calls on $2.77 trillion in credit default swaps threatened to force the company into bankruptcy.

On Sept. 16, 2008, the Fed provided AIG with a line of credit totaling $85 billion in exchange for 79.9 percent of its stock.

The Fed and the U.S. Treasury later that year found that AIG needed a lot more aid.

In a summary released yesterday, Benmosche said that the maximum support authorized by the U.S. government to AIG reached $182 billion in 2008, of which $21 billion was unused or expired.

He said that, together with repayments, withdrawals, exchanges, sales, and other actions, total outstanding government support to AIG has decreased 83 percent, or $152 billion, with approximately $30 billion worth of shares of AIG common stock owned by the U.S. Treasury as the remaining investment.

“It should be noted that the $152 billion decrease only includes a reduction of original authorized support and not the Federal Reserve’s profit to date on Maiden Lane II or the expected profit for Maiden Lane III,” Benmosche said.

He added in the statement that, to date, AIG has paid in full the FRBNY Credit Facility, the AIA SPV preferred interests, and the American Life Insurance Company (ALICO) SPV preferred interests.

In addition, the U.S. Treasury’s stake in AIG common stock has been reduced by $17.5 billion and the Maiden Lane II and III loans have been fully repaid.


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